Here we explain how building savings work, what role building savings contracts can still play in the face of generally low interest rates, and for whom and when they are still worthwhile.
The essentials in brief:
- With a home savings contract, home savings customers insure themselves against rising interest rates. In this way, you can secure the current favorable loan interest rate for years in advance, but the savings interest rate is comparatively low.
- Building savings contracts are suitable for long-term planning. It is still recommended for financing future upgrades. However, it is no longer attractive for the sole financing of a house construction project – i.e. for large sums – given the current interest rate situation.
- The low level of interest rates is causing the institution of home savings to falter.
How does a building savings contract work?
Building savings contracts are long-term loans where the lender is the building savings bank. The loan is tied to a real estate financing (construction, purchase, modernization). However, savers also use building savings contracts.
The borrower and the building society agree on a building savings sum, which is made up of the saved credit balance and the subsequent loan. The building savings tariff sets the savings interest rate and the loan interest rate for the entire period when the contract is concluded. An average standard tariff has a contract term of 18 – 20 years, with the accumulation period amounting to about 7 years (maximum about 15 years).
As of January 2018, savings interest rates range from 0.1% to 0% and loan interest rates range from 1.2% to 4.8%, depending on the home savings plan. In addition, government subsidies can be expected: Employee allowance, Riester subsidy, capital-forming benefits, housing subsidy.
The benefits and performance requirements of a building savings contract are divided into three phases: Savings phase, Allocation phase, Loan phase.
The borrower saves a contractually fixed minimum amount. This usually amounts to between 40% and 50% of the building savings sum (savings and loan sum). Only those who have fulfilled the minimum savings requirement are entitled to the building savings balance and the building savings loan. The savings interest rates are contractually fixed and are independent of the financial market over the term of the contract. The savings interest rate of a home savings contract is generally lower than that of overnight money, which is compensated for by the favorable interest rate on the loan.
The allocation requirements have been met and the home savings contract is thus “ready for allocation”. The borrower can now cash out the balance and the loan.
The allotment requirements are:
- Minimum balance: The borrower has saved the contractually stipulated minimum amount of 40% to 50% of the building savings sum.
- Minimum contract period: At least the fixed period between contract conclusion and allocation must be observed.
- Minimum savings period: The minimum savings period of a building savings contract is fixed, ranging from 18 months to 7 years, depending on the contract. Even if the agreed credit should be saved earlier, credit and loans will be paid out only after the minimum savings period has expired .
- Minimum valuation number: The valuation number regulates the order of allocations to the building savers. On the one hand, a certain valuation figure must be met for the allocation maturity, and on the other hand, contracts with a higher valuation figure are given preference in the payout. The valuation figure is based on savings contributions, accrued interest and the term of the contract. On fixed dates (nowadays usually monthly) the data are collected and the evaluation figures are adjusted.
The borrower receives a loan in addition to his or her credit balance, and together they add up to the agreed building savings amount. The loan is charged with the loan interest rate agreed upon conclusion of the contract. The term of the loan is usually 9 – 15 years. So it is quite short compared to normal loans for real estate financing. For this reason, the repayment installments can also be comparatively high, although the shorter term also means that the total interest burden is lower. Beyond that, there is no purchase obligation for the loan. The saver can also have the credit balance paid out at any time.
The building savings principle
In principle, building savings work via the totality of all building savers at a particular building society. This is because all home savings customers pay into the same pot. The building savings loans are then granted exclusively from this. Likewise, all repayments flow back into the common pot. In theory, the latter is then always equipped with sufficient funds to serve all home savings customers. However, if the funds are too low, this jeopardizes the payment of the building savings sum. This happens when the building society has to pay out too many building savings amounts at the same time. Then the minimum rating number governs the order of payouts. There is therefore no guarantee as to the allocation date, even if the investment is ready for allocation. Home savings customers may then have to wait months for their home savings amount. This can lead to problems if there are already fixed plans and commitments, resulting in expensive interim financing.
For whom is building savings worthwhile?
Building savings is only suitable for long-term planners
Basically, building savings is only worthwhile for people who plan for the long term. Those who do not want to build for another 5 to 10 years may consider a building savings contract. The decisive advantage here is that the building society tariff – i.e. the contract interest, which is made up of savings interest and loan interest – is fixed when the contract is concluded. The borrower is then not affected by changes in the interest rate level on the capital market. For this reason, home savings contracts are particularly worthwhile when interest rates are generally expected to rise and loans to become more expensive.
In principle, a building savings contract is therefore not suitable for people who want to realize their house building project in a timely manner. This is because the minimum savings period specified in the contract (18 months to five years) must be observed. Even if the minimum amount of 40% – 50% of the building savings sum should be saved earlier. A building savings contract is always ready for allocation only after the minimum savings period has expired.
At the current low interest rate level, there is even a threat of a so-called negative savings yield
The low level of interest rates is undermining the effect of home savings contracts. This is because at low savings interest rates (0.1 and 0%), it may not even be possible to pay the acquisition fee of the building savings contract (negative savings return). The interest rate on loans (1.2% and 4.8%) is also often not attractive enough at present to compensate for the low interest rates on savings. In addition, other construction financing loans with more flexible terms are very favorable at the moment. For example, the disadvantages currently faced by home savings savers (comparatively low savings interest rates, long-term nature, inflexibility, comparatively shorter term of the loan) often no longer result in significant advantages (favorable loan with stable interest rates).
Building savings is not recommended for high sums
In addition, financing the construction of a house solely through a building savings contract is not very advisable. This is because, in the case of high building savings sums, the saver must also first save a high sum (e.g. at least EUR 80,000 credit for a EUR 200,000 building savings sum). This amounts to a high monthly charge over a long period of time. The subsequent loan of EUR 120,000 must then be repaid by the home savings customer in a comparatively short period of time compared to other construction loans, which again results in a high monthly burden.
Favorable interest rates can still be secured
For building owners, however, a building savings contract can still lead to a more favorable loan if the conditions are good. After all, the development of loans for real estate financing cannot be predicted with certainty: Even if a seriously higher interest rate level is not to be expected in the short to medium term, the home savings saver can secure the current low interest rates. The building savings contract is worthwhile if the saver actually takes advantage of the favorable loan and, in addition, the interest rate level rises during the specified period.
Building savings as a pure financial investment is not worthwhile
Unlike in the past, the building savings contract is no longer relevant as a pure financial investment. After all, at the turn of the millennium, the savings interest rate was around 4%; today it is only 0.1-0%.
Tip: Worthwhile building savings for future modernizations
Modernizations that occur a few years after the house is built are a proven way to maintain or increase the value of the house. Value-enhancing modernizations are particularly useful in the following areas: modern heating technology, improved thermal insulation, improvement of energy efficiency, refurbishment of bathrooms. An all-round strike is quickly associated with high costs: 30,000 EUR financing requirements are not uncommon. Since you know for sure when you build a house that the modernizations will not occur for years, a building savings contract can be used for this purpose. For the above sum, you then need to save 40% – 50% and get the remaining amount at a favorable loan. After comparing different building savings rates, the building savings contract may prove to be a better alternative to other forms of credit.
The acquisition fee
The building societies charge an acquisition fee on the conclusion of a building savings contract. This is usually between 1% and 1.6% of the building savings sum, although there are sometimes contracts with a signing fee of up to 3% of the building savings sum.
Due to the acquisition fee charged when the contract is concluded, the home savings account is initially in the red. With a building savings sum of 100,000 EUR, this is after all 1000 to 1600 EUR. The savings process then begins only when this fee is repaid. With the above example and a monthly savings amount of 100 EUR, that is 10 months up to 1 year and 4 months. This is another reason why the highest possible interest rates on credit balances, government subsidies and capital-forming benefits are important for home savings contracts. It makes sense for the acquisition fee to be financed entirely by interest and subsidies. However, with the current low level of interest rates, it is often the case that the savings interest on the credit balance cannot even pay the acquisition fee. Also, often the interest rates on loans are not attractive enough to compensate for this disadvantage.
In addition, some building societies even charge a fee on the disbursement at allotment maturity of 1% – 2% of the loan amount. Borrowers should therefore always compare different providers carefully.
The other variant of the building society loan: the constant loan
The constant loan is a combination of building savings and advance financing. Building savings banks designed this model in response to the declining relevance of the normal building savings model. The borrower receives the loan amount immediately upon conclusion of the contract, thus eliminating the long accumulation period. As a result, interest installments are charged on the loan, but no repayment installments. On the other hand, a monthly amount is paid into the building savings contract. As soon as this is ready for allocation, the advance loan is redeemed. Only then is the loan serviced with interest and repayment installments each month.
Here, too, the building savings rate is secured to a certain extent and ensures interest rate security. A certain flexibility is provided by the possibility of unscheduled repayments. In addition, subsidies are available in the form of the housing construction premium.
It should be noted that this combination solution often compares poorly with other loans. This is particularly the case because the fixed interest rate on the advance loan may expire before the contract is ready for allocation. In addition, cost traps can arise from interim financing if the term of the advance loan expires before the home savings contract is ready for allocation.
Here you will find an overview of other credit models.